Gaining Perspective on Alternative Investments

It is well known that institutional investors, including Endowments, Foundations and Public Employee pension plans have historically included a significant allocation in their portfolios to Alternative Investments.

To address their funding gaps and operational budgets, institutional investors have made private market allocations a staple of their portfolios. But individuals and defined contribution plans remain relatively underexposed, if not altogether unallocated.

The main reason is clear enough:

The illiquidity that is a hallmark of these strategies is not a hurdle for institutional investors with long time horizons, but it’s a very big obstacle for most individual investors.

Other factors contribute, too: high investment minimums, steep net-worth qualifications for investor participation, complex tax treatment, and even the inability to source (and access) quality opportunities, in part due to limitations on advertising private placements. 

But recently new product types, emerging platforms, and trading technologies, as well as key legal and regulatory changes, have made alternative investments (AI) a more realistic opportunity for individual investors.

Historically, the traditional 60:40 allocation to Stocks and Bonds has served investors fairly well. 

However, periodic crashes that have bedeviled those portfolios in the past are certain to repeat. 

In addition, in today’s ever broadening Global Economy, there is becoming a convergence of correlations that, particularly in a time when the portfolio is required to provide distributions to support current income needs and withdrawals create a negative dollar cost averaging impact.

A portfolio that is adjusted to include a significant allocation to alternatives, has shown to be able to create an improvement in overall portfolio performance.

For the Advisor, as the industry as we know it continues to shift, there are three big questions to answer: 

How can you adapt your business model to deliver solutions that support your clients’ needs; how can you set yourself apart from your competition; and, on top of it all, how can you ensure the profitability and sustainability of your practice?

  1. How can you adapt your business model to deliver solutions that support your clients’ needs?
  2. How can you set yourself apart from your competition?
  3. how can you ensure the profitability and sustainability of your practice?

The answers are not simple, and while there’s no single solution, many advisors are finding that there is one approach that can help address —at least to some degree—all three challenges: Alternative investments. 

Here’s why alternative investments may be an answer you’ve been looking for:

1: Alternatives can help you stand out in a crowded playing field.

Whether you are battling brokerage firms, the “guy down the street,” or robo-advisors, one way to stand out from the crowd is to deliver clear, tangible value to your clients. 

First, alternative investments are an important diversification tool within your clients’ portfolios. Second, they’re simply not on the menu at most larger brokerage firms—or on robo-advisor platforms. 

Plus, many of the advisors you compete against may shy away from the research required to analyze and select appropriate alternatives. If you’re willing to do your homework, alternatives may just be the differentiator you’ve been looking for.

2: Alternatives are well suited to today’s market environment.

Low interest rates, high volatility, and an aging bull market have many investors wondering if it’s time to rethink a passive, equities-based approach to retirement planning—especially if higher yields are needed to reach their investment objectives. 

Because alternatives are positioned to generate returns in rising and falling market environments, a more active approach to portfolio management that leverages alternatives has the potential to help increase returns

Plus, when combined with multiple asset classes such as stocks, bonds, currencies, and commodities, alternatives may help provide the all-important diversification element that your client’s portfolios require.

3: Alternatives can open the door to conversations with your clients.

The days are gone when you could “set and forget” your client relationships—much less your clients’ portfolios. Alternatives offer a great reason to reach out to existing clients and have a new conversation. 

And initiating that conversation is one of the most important actions you can take to re-establish yourself as your clients’ trusted advisor. It can assure them that lower-cost or even free investment advice that they may be considering does not provide the guidance they need to achieve their goals. 

Of course, alternative investments aren’t the only answer to managing the storm of change across the industry, but by including alternatives in portfolios, you may be able to create the portfolio return and the client differentiation you need to stand out in a ever more crowded playing field. 

Now is the time to research the options, determine which alternatives make the most sense, and then start the conversation with your clients. Your clients will value your active guidance and, ultimately, your proven dedication to helping them achieve their investment goals

That, in the end, is every advisor’s key to success.

Mark Petersen is a Managing Director for Concierge for Advisors, Inc. He has served in a number of capacities as a leader and spokesperson for the Alternative Investment industry for over 30 years. 

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